Prudential Financial, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011; financial statements are unaudited. Amounts are in U.S. dollars. Prudential provides insurance, annuities, retirement services, investment management and related financial services. Results are reported across the Financial Services Businesses and the separately managed Closed Block Business.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $14.917 billion | $9.917 billion | $37.350 billion | $30.151 billion |
| Net income attributable to Prudential | $1.534 billion | $1.244 billion | $2.980 billion | $3.018 billion |
| Diluted EPS, Common Stock | $3.06 | $2.46 | $5.93 | $5.31 |
| Financial Services adjusted operating income, pretax | $676 million | $1.381 billion | $2.989 billion | $2.838 billion |
| Operating cash flow | Not presented quarterly | $10.821 billion | $4.604 billion |
Revenue growth was substantially influenced by realized investment gains, including a large derivatives-related gain in Q3 2011; it should not be read as equivalent growth in recurring operating activity. Financial Services adjusted operating income is a non-GAAP segment measure. It fell sharply in Q3, chiefly because Individual Annuities reported a $191 million adjusted operating loss, versus $588 million income a year earlier. For nine months, it increased modestly. The filing does not provide a single meaningful consolidated operating margin; the revenue mix includes volatile investment gains and insurance-related items.
- Balance sheet, September 30: Total assets were $611.473 billion, versus $539.854 billion at December 31, 2010; total equity was $37.804 billion, versus $32.928 billion. Growth reflects, in part, the Japan acquisition and higher investment values.
- Investments: Total investments were $352.560 billion, including $252.112 billion of available-for-sale fixed maturities. Net unrealized gains on general-account fixed maturities increased, primarily as risk-free rates declined.
- Debt and liquidity: Short- and long-term debt totaled $26.819 billion, up from $25.635 billion at year-end. Cash and cash equivalents were $15.526 billion. Prudential Financial, Prudential Insurance and Prudential Funding had $4.108 billion of committed credit facilities with no borrowings outstanding. The parent holding company had $6.060 billion of cash and short-term investments.
- Cash flows, nine months: Investing activities used $10.984 billion and financing activities provided $2.593 billion; cash increased $2.611 billion to $15.526 billion. Operating cash flow rose year over year, but includes significant insurance-liability and other working-capital adjustments.
Material changes versus comparable periods
- Q3 net income attributable to Prudential rose 23%, while nine-month net income was slightly lower. Nine-month diluted Common Stock EPS rose to $5.93 from $5.31.
- On February 1, 2011, Prudential acquired AIG’s Star and Edison Japanese insurance businesses for $4.709 billion, including $496 million of assumed debt. The businesses contributed $3.804 billion of revenue and $721 million of continuing-operations income from acquisition through August 31.
- International Insurance benefited from the acquired businesses and a $237 million pretax gain during the first nine months from a partial sale of an indirect investment in China Pacific Insurance Group. Results also included $119 million of Star and Edison transaction and integration costs.
- Prudential completed the sale of its Global Commodities Business to Jefferies on July 1, receiving $422 million. Its results are presented as discontinued operations.
- Common Stock repurchases totaled $750 million during Q3; the board authorized repurchases of up to $1.5 billion through June 2012.
Outlook, risks and unusual items
- Outlook: The filing gives no company-wide earnings guidance. Management states that available cash sources are sufficient for current liquidity needs, including reasonably foreseeable contingencies. Prudential expected to complete repositioning of Star and Edison investment portfolios by year-end 2011 and integrate core operations by early 2012, subject to approvals. It expects about $500 million of pretax integration costs over five years, including approximately $400 million in 2011–2012, and about $250 million of annual cost savings after integration; actual results may differ.
- Market-sensitive annuity guarantees: Q3 equity-market declines and lower interest rates increased variable-annuity guarantee liabilities and contributed to adverse DAC/reserve adjustments. The filing reports an $8.730 billion net liability for Individual Annuities optional living-benefit embedded derivatives before a $5.732 billion cumulative reduction for Prudential’s own non-performance risk adjustment. Hedge mismatches and the valuation adjustment can create substantial earnings volatility.
- Unusual charges and accounting: A $139 million Q3 reserve increase relates to expected death-benefit claims identified using revised Social Security Death Master File matching criteria. A separate $95 million first-quarter out-of-period adjustment reduced pretax continuing income; management said it was not material to prior periods and did not affect adjusted operating income. Japan earthquake and tsunami claims and expenses generated a $63 million pretax charge for the first nine months.
- Future accounting change: New insurance acquisition-cost guidance is to be adopted in 2012 retrospectively. Estimated adoption impact as of September 30: reduce deferred acquisition costs by about $4.0–$5.0 billion, increase certain policy reserves by $0.2–$0.3 billion and reduce equity by approximately $2.7–$3.3 billion. Management expects possible lower initial earnings but no cash-flow impact.
- Other risks: The filing highlights market and interest-rate volatility, low rates, investment credit losses, reserve and actuarial assumptions, foreign exchange exposure, regulation, ratings, litigation and the holding company’s reliance on subsidiary distributions. Ongoing unclaimed-property reviews and litigation may affect results; management did not expect pending matters, after reserves and indemnification, to materially harm financial position.
Important facts for investors to verify
- How much of reported earnings and revenue growth came from recurring operations versus derivatives, currency movements, investment gains and acquisition effects.
- The sensitivity of variable-annuity guarantee liabilities, hedges and capital to further equity-market declines, low rates and changes in non-performance-risk assumptions.
- Star and Edison integration costs, realized synergies, portfolio repositioning and the acquired businesses’ contribution to International Insurance results.
- The final impact and timing of retrospective acquisition-cost accounting, including the estimated reduction in equity and possible earnings effects.
- Reserve adequacy for death-benefit claims, investment impairments and litigation, and the availability of subsidiary dividends, capital and liquidity under stress.